USD stabilises despite faltering confidence
The US dollar experienced another broad-based sell-off last Friday amid disappointing inflation and retail sales data. Commodities currencies benefited the most of this renewed USD weakness as investors discounted an aggressive Fed rate path. The single currency rose 0.58% to 1.1875 before eroding gains and returning towards 1.1820 as market participants appeared reluctant to load long EUR position against the backdrop of political uncertainties across the European Union – mostly Catalan and Austrian situation.
Regarding the inflation in the US, the headline measure came in at 2.2%y/y versus 2.3% expected and 1.9% in August, while the core measure, which excludes the most volatile components, held stable at 1.7% versus an expected increase of 1.8%. The solid pick-up in the headline measure is mostly due to a surge in energy prices as motor fuel prices and fuel oil rose 13%m/m and 8.2%m/m, respectively. Food prices, on the other hand, remained roughly stable, increasing only 0.1%m/m. The increase in energy prices stemmed from the combination of two main factors. Firstly, oil prices have strengthened over the summer months amid shrinking oil inventories in US and efforts of OPEC producers to trim production in an attempt to boost oil prices. Secondly, the series of hurricanes that hit the Gulf Coast disrupted significantly oil production and also triggered widespread gas hoarding.
On Monday morning, however, the greenback got some colour back as fears eased. The US dollar erased almost completely Friday’s losses against the euro and the pounds, while the Aussie and the Kiwi consolidated previous gains. Investors don’t know where to stand against the backdrop of an uncertainty outlook on both side of the Atlantic. Indeed, the single currency has benefited extensively of the weakness in US inflation together with mounting speculations of the upcoming reduction of the ECB’s QE. Now that the EU is facing another political crisis, investors are reconsidering other alternatives.
Eurozone: Political worries increase
The single currency decreased after the market opening against the dollar. The Austrian Legislative Election brought new uncertainties. The young conservative leader Sebastian Kurz, an anti-immigration millennial, is about to become the new Austrian Chancellor next Sunday after his victory in the General Election. Yet he will likely open up to the far right in order to build its government. This reminds us of 2000 when Far-right entered the government. Yet it does not seem that the new government will be against the euro.
In Spain, tensions continue and Catalonia still has to declare unilaterally its independence. There are tensions within the independentists. Some believe that Catalonia is not ready yet for its independence. Madrid is now giving an ultimatum to Catalonians leaders. For the time being, companies are moving away from Catalonia, other entrepreneurs are opening account in bordering areas.
As a result, political tensions are strong in Europe. The Eurodollar pair lies below 1.18 and any news can trigger further political fears. We continue to believe that strongest uncertainties are not in centre stage at the moment but the Greek debt issue has definitely the potential to weigh on the single currency. The next ECB monetary policy is not at the moment the main driver even though markets have strong tightening expectations
